Confluent Inc – Aug 03, 2023

As digital transformation continues to reshape industries, the necessity for reliable, real-time, and scalable data streaming services is paramount for businesses seeking to effectively leverage their data assets.

Confluent is on a mission to set this data in motion. The company has pioneered a new category of data infrastructure designed to connect all the applications, systems, and data layers of a company around a real-time central nervous system.

Confluent has created a data streaming platform based on Apache Kafka, an open-source stream-processing software that enables businesses to harness the power of real-time information by offering seamless integration and processing capabilities. The platform allows companies to access data as live streams, thereby providing insights, driving decisions, and creating innovative products and services.

These capabilities make it possible for clients to create rich, digital front-end customer experiences as a primary way of interacting with customers. It also allows them to maintain up-to-date, software-driven back-end operations for a broad range of clientele spanning from emerging start-ups to Fortune 500 companies, across sectors including retail, finance, logistics, and technology among others.

Having transitioned from a promising start-up to a leading name in the data streaming services sector, Confluent continues to focus heavily on expansion. In addition to enhancing its product portfolio and offering more comprehensive, user-friendly, and secure data streaming solutions, the company is focused on driving growth by expanding its global presence, capturing new markets, and leveraging its existing client base, as well as its vast open source community and partner ecosystem.

Confluent was established in 2014 by Jay Kreps, Neha Narkhede, and Jun Rao, three of the original developers of Apache Kafka at LinkedIn. They aimed to harness the power of real-time data streams and provide businesses with the tools to navigate the emerging data landscape.

In the early years, Confluent focused on offering support, training, and tools around the open-source Apache Kafka platform. The demand for more comprehensive data solutions led to a rapid acceleration in Confluent’s growth and customer base and by 2015, the company had released the first iteration of Confluent Platform, which included a range of additional tools that made Kafka easier to use and manage.

In 2017, the company introduced Confluent Cloud, a fully-managed streaming data service on the public cloud, initially launched on Amazon Web Services. The cloud offering brought Kafka’s capabilities to a wider audience by eliminating the operational burden, thereby experiencing a swift uptake across a broad spectrum of businesses.

As the product matured, Confluent expanded the breadth and depth of its offerings, including security features and connectors for widely used data systems. They also started developing integrations with other major enterprise software companies.

Confluent went public in 2021, which further fueled its global expansion and product development, as the company continued to innovate. It acquired several technology companies and released new features, notably Data Coral and Data-in-Motion which helped to extend the company’s data integration capabilities and develop more comprehensive data streaming solutions.

Co-founder Jay Kreps continues to lead Confluent as chief executive officer. He is an industry-recognized thought leader with an impressive background in technology and data infrastructure. Before Confluent, he worked at LinkedIn where as a principal staff engineer, he co-created Apache Kafka. Under his leadership, Confluent has experienced substantial growth and has expanded its offerings and partnerships. In addition, he is also the author of several popular books and papers on data infrastructure and distributed systems.

Fellow co-founder and Apache Kafka co-creator, Jun Rao, also continues to serve at Confluent, helping advance the technology of Apache Kafka and helping users adopt Kafka-based solutions more easily. He is the co-author of more than 20 referenced research papers, and the co-inventor of more than a dozen U.S. software patents, His deep understanding of data systems has been invaluable in shaping Confluent’s technology vision.

While not part of the daily operations, fellow co-founder, Neha Narkhede, remains on the Confluent board.

For enterprises to deliver rich customer experiences, it is critical for all of their business functions, departments, teams, applications, and data stores to have complete connectivity, be thoroughly integrated, and be able to analyze data as it is generated. Confluent is designed to be this intelligent connective tissue by having current data from multiple sources constantly streamed across an enterprise for real-time analysis.

The company’s offering enables organizations to deploy production-ready applications that run across cloud infrastructures and data centers, with enhanced features for security and compliance. Confluent’s solution can be deployed either as a fully-managed cloud-native SaaS offering available on-demand, Confluent Cloud, or an enterprise-ready, self-managed software offering, Confluent Platform. The cloud service offers infinite scalability, robust security, and reliable disaster recovery mechanisms, and it supports hybrid and multi-cloud environments to meet diverse deployment needs.

As organizations mature in their adoption cycle, the platform enables them to build more and more applications that take advantage of data in motion. Businesses can continuously provide better and differentiated customer experiences, such as suggesting the next show to watch in real-time or providing live information on the status of a grocery order; whilst concurrently driving data-driven business operations such as real-time, preventive maintenance, IoT analytics, and diagnostics.

The platform enables customers to start developing instantly, without any internal or external operational barriers, accelerating time-to-market and also reducing the costs associated with shifting to a data-in-motion architecture. In addition, Apache Kafka has an extremely robust developer community, with more than 65,000 members which is driving usage across an estimated 75% of the Fortune 500. Confluent continues to leverage these open-source developments and has helped build an ecosystem of contributors.

In retail, companies like Target are using Confluent to maintain accurate inventory tracking across multiple channels to ensure a consumer can have an up-to-date snapshot of what is actually in-store, versus leaving a consumer disappointed on arrival when the product that they thought was available is out-of-stock. Manufacturers like Bosch are harnessing a real-time flow of data from IoT sensors to deliver predictive maintenance and reduce downtime, versus episodic, manual inspections of equipment. While in financial services, for firms like ING Bank, Confluent is the difference between detecting and preventing fraud versus reacting afterward.

In addition to the core platform, the company provides professional services offering expertise and tools that help customers plan, implement, monitor, and optimize their platform and applications. Training and certification guidance, technical resources, and access to hands-on training and certification exams are also available. While a certification program enables technical personnel to demonstrate and validate in-depth knowledge of data in motion.

As data continues to permeate every aspect of business, the opportunities for Confluent to expand are vast. The company is capitalizing on the burgeoning demand for real-time data processing and movement, as additions including ksqlDB and Stream Designer continue to extend the platform’s capabilities and make it easier for organizations of any size to harness data in motion without intensive developer engagement.

Confluent’s growth strategy aims to exploit this significant market opportunity through several avenues. This includes leveraging its cloud-native capabilities to enable seamless and frictionless customer onboarding with a low entry, no commitment, pay-as-you-go model. Their integrated go-to-market model focuses on nurturing customers through all stages, from initial interest, to first production project, to enterprise-wide platform deployment.

After acquiring a new customer, Confluent seeks to grow its footprint by solving additional use cases for that customer. Once one application is connected to the platform, customers often connect other applications to that first application, resulting in a flywheel where Confluent can permeate the enterprise, and create a powerful network effect, further driving growth.

Confluent’s open-source roots provide a large pool of developers and enterprises both inside and outside of the company, who are building connectors, more functionality, and deploying patches, both to Apache Kafka and Confluent’s proprietary offering. This leads to a virtuous feedback loop as it strengthens the Apache Kafka offering, attracting more developers, who in turn further strengthen the platform, which ultimately benefits Confluent.

The company’s partnership ecosystem includes major cloud players like Amazon, Microsoft, and Google, among others. By nurturing and expanding these relationships, Confluent ensures that its software is widely distributed and supported, providing a robust channel for further growth and market penetration.

With just 38% of their total revenue coming from outside the United States, Confluent sees the international market presenting a significant opportunity for additional growth. In particular, India is a key market where the opening of a new office in Bangalore has helped scale its global presence. The country’s public cloud services market is growing at a rapid rate creating many use cases among customers.

Confluent also envisages growth into use-case-specific adjacencies that stand to benefit from applying data in motion. The company intends to tap into cross-industry adoption of use cases around machine learning, IoT, data integration and unification, real-time analytics and logistics, cloud migration, micro-services, and data sharing, as well as countless others.

Confluent has demonstrated strong momentum in revenue growth since going public, closing FY22 with total revenue of $586 million, reflecting a 51% increase year-over-year. This growth was propelled by increased sales to both existing and new customers, underpinned by a dollar-based net retention rate of just under 130%. In a particular highlight, 2022 Confluent Cloud revenue surged by more than 124% year-over-year, while customers spending more than $100k in annual recurring revenue also saw a 35% year-over-year increase. Continuing the positive trend in 2023, first-quarter revenue reached $174 million, a 38% increase year over year, with existing customers again providing solid leverage.

While improving gross margins has been a key focus for the company, Confluent’s subscription gross margin remained flat in 2022. This was primarily due to a shift in revenue mix toward Confluent Cloud, which has a lower gross margin. However, this effect was offset by economies of scale, resulting from increased efficiency and optimization of infrastructure.

Looking ahead, management’s expectations for FY23 total revenue stand at $760 to $765 million, aligning with analysts’ expectations at $763.2 million and representing year-over-year growth of 30%. Earnings per share are also forecasted to improve remarkably, going from a loss of $0.58 to a loss of just $0.17 in 2023, marking a 70% improvement.

The competitive environment for Confluent is both dynamic and multifaceted, reflecting the rapidly changing technology landscape, evolving customer needs, and constant innovation in products and services.

Confluent’s primary competition, particularly on-premise, stems from internal IT teams opting to “do it themselves” using open-source software. Yet, with the accelerating move to the cloud, competition from open-source alternatives is expected to wane as businesses increasingly favor fully-managed cloud solutions.

In the cloud arena, Confluent faces stiff competition from well-established public cloud providers such as Amazon, Microsoft, and Google, who are developing and releasing fully-managed data ingestion and data streaming products that directly challenge Confluent’s market position.

However, Confluent appears well-positioned given its emphasis on data in motion, product differentiation, and diverse offerings, its competitive advantages lie in its specialized focus, cloud-native capabilities, and ability to adapt across various customer environments, setting a strong foundation in the contested field.

Confluent’s success in the data streaming services sector has been marked by a well-defined growth strategy that capitalizes on the burgeoning demand for real-time data processing and movement. With a broad market supported by a wide and growing range of potential use cases coupled with the adoption of emerging technologies, Confluent is well-positioned to exploit significant market opportunities, pointing to a promising outlook ahead.